INSIGHT: Trump to bring US chems more tariffs, fewer taxes, regulations

HOUSTON (ICIS)–US President-Elect Donald Trump has pledged to impose more tariffs, lower corporate taxes and lighten companies’ regulatory burden, a continuation of what US chemical producers saw during his first term of office in 2016-2020.

• More tariffs could leave chemical exports vulnerable to retaliation because of their magnitude and the size of the global supply glut.
• Trump pledged to reverse the surge in regulations that characterized term of President Joe Biden.
• Lower corporate taxes could benefit US chems, but longer term, rising government debt could keep interest rates elevated and prolong the slump in housing and durable goods.

MORE TARIFFS
Trump pledged to add more tariffs to the ones he introduced during his first term as president, as show below.

• Baseline tariffs of 10-20%, mentioned during an August 14 rally in Asheville, North Carolina.
• Tariffs of 60% on imports from China.
• A reciprocal trade act, under which the US would match tariffs imposed on its exports.

WHY TRADE POLICY MATTERS FOR CHEMICALS
Trade policy is important to the US chemical industry because producers purposely built excess capacity to take advantage of cheap feedstock and profitably export material abroad. Such large surpluses leave US chemical producers vulnerable to retaliatory tariffs.

The danger is heightened because the world has excess capacity of several plastics and chemicals, and plants are running well below nameplate capacity.

At the least, retaliatory tariffs would re-arrange supply chains, adding costs and reducing margins.

At the worst, the retaliatory tariffs would reach levels that would make US exports uncompetitive in some markets. Countries with plants running below nameplate capacity could offset the decline in US exports by raising utilization rates.

Baseline tariffs would hurt US chemical producers on the import side. The US has deficits in some key commodity chemicals, principally benzene, melamine and methyl ethyl ketone (MEK).

In the case of benzene, companies will not build new refineries or naphtha crackers to produce more benzene. Buyers will face higher benzene costs, and those costs will trickle down to chemicals made from benzene.

Tariffs on imports of oil would raise costs for US refiners because they rely on foreign shipments of heavier grades to optimize downstream units.

The growth in US oil production is in lighter grades from its shale fields, and these lighter grades are inappropriate for some refining units.

REGULATORY RELIEF
Under Trump, the US chemical industry should get a break from the surge in regulations that characterized the Biden administration.

The flood led the Alliance for Chemical Distribution (ACD) to call the first half of 2024 the worst regulatory climate ever for the chemical industry. The American Chemistry Council (ACC) has warned about the dangers of excessive regulations and urged the Biden administration to create a committee to review the effects new proposals could have on existing policies.

Trump said he would re-introduce his policy of removing two regulations for every new one created.

Trump has a whole section of his website dedicated to what he called the “wasteful and job-killing regulatory onslaught”. One plank of the platform of the Republican Party is to “cut costly and burdensome regulations”.

LOWER TAXES AT EXPENSE OF DEFICIT
Trump pledged to make nearly all of the 2017 Tax Cuts and Jobs Act (TCJA) permanent and add the following new tax cuts, according to the Tax Foundation, a policy think tank.

• Lower the corporate tax rate for domestic production to 15%.
• Eliminate green energy subsidies in the Inflation Reduction Act (IRA).
• Exempt tips, Social Security benefits and overtime pay from income taxes.

At best, the resulting economic growth, the contributions from tariffs and cuts in government spending would offset the effects of the tax cuts. The danger is that the tariffs, the cuts and the growth growth are insufficient to offset the decline in revenue that results from the tax cuts.

The Tax Foundation is forecasting the latter and expects that that the 10-year budget deficit will increase by $3 trillion.

To fund the growing deficit, the US government will issue more debt, which will increase the supply of Treasury notes and cause their price to drop. Yields on debt are inversely related to prices, so rates will increase as prices drop.

Economists have warned that a growing government deficit will maintain elevated rates for 10-year Treasury notes, US mortgages and other types of longer term debt.

Higher rates have caused some selective defaults among chemical companies and led to a downturn in housing and durable goods, two key chemical end markets.

If the US deficit continues to grow and if interest rates remain elevated, then more US chemical companies could default and producers could contend with a longer downturn in housing and durable goods.

A second post-election insight piece, covering the future landscape for energy policy, will run on Thursday at 08:00 CST.

Front page picture: The US Capitol in Washington 
Source: Lucky-photographer